Before You Fire an Employee, CYA

Ending relationships with employees can prove to be surprisingly expensive. If your business is in a position where it needs to cut the payroll in order to save overhead, be aware that without careful preparation and execution, terminations and layoffs can cost you more than they save you. Fighting a wrongful discharge claim can be pretty daunting, even when the claim is entirely false. Suppose an employer has done absolutely nothing wrong and has the documentation to prove it. Getting a simple termination-related lawsuit through a successful motion to dismiss could easily cost $100,000 or more and take more than a year—which is why most cases settle. Investing a little effort in the termination process can prevent expensive headaches.

In order to file a claim of wrongful termination with a federal or state agency or court, a former employee must allege that he or she was let go on either a discriminatory or a retaliatory basis. Under federal, state, and local laws, it is illegal to terminate an employee on the basis of age, race, creed, color, national origin, gender, disability, and a host of other “protected characteristics.” While most business owners are aware of these laws, many are unclear as to how to legally protect themselves against violating them. The same holds true for retaliation claims. One third of all federal claims of wrongful discharge now include an allegation that the termination was carried out in retaliation for exercising the right to complain or engage in protected activity.

In retaliation cases, the time line is very important. For example, if an employee complains of on-the-job harassment, or publicly engages in union-organizing activity, and is fired within a matter of days, the employer will be hard-pressed to convince a judge or jury that the firing was not retaliatory. Most of these cases are “fee-shifting”, meaning that the burden of paying the complainant’s legal expenses may be moved to the employer if the complainant is successful, but the reverse is never true. Consider terminations for cause (individual terminations based on employee performance problems) and mass layoffs (group terminations based on the company’s economic issues) carefully before making them, no matter how much immediate financial pressure you face. Some strategies for planning and executing low-risk terminations and layoffs are discussed below.

What to Consider

Before making the final decision to terminate an employee, carefully consider all the possible outcomes and whether you have the ammunition you will need if you are forced to defend it.

  • Make sure you have a documented history of providing the employee with meaningful feedback if you are terminating due to performance issues. If you have repeatedly discussed disciplinary or performance problems with the employee, and the employee has been consistently unwilling or unable to address the issues you have raised, make sure you have written evidence demonstrating this experience.
  • Think about whether the employee is a member of any group protected under discrimination laws and could have any possible grounds for making a discrimination or harassment claim. Legal review is essential before any action is taken whenever such a claim is a possibility. If harassment may be an issue, a thorough investigation of any alleged incident will have to be conducted.
  • If you decide to terminate employees for economic reasons, ask yourself whether there is any alternative, such as a reduction of hours or benefits, that could be tried in lieu of termination. Some employers succeed in instituting a four-day workweek during difficult periods. Review employee utilization of your current benefit plans— sometimes eliminating a benefit that is not particularly popular with employees can result in meaningful savings.
  • Consider reviewing the proposed termination with an employment attorney before taking an action that may place your company at risk. It is possible to terminate an employee with a potential claim (discrimination, retaliation, leave law violation, etc.), but it requires extra steps.
  • Be aware that your actions should be perceived as fair, by both departing and remaining employees. Terminations that are perceived as unfair diminish company morale and increase litigation risk. An employee should not hear about performance problems for the first time in a termination meeting; this may precipitate a discharge claim. Surviving workers who think others have been fired arbitrarily will fear that they are next, and may begin seeking other employment and/or agree to serve as witnesses in a former co-worker’s action against your company.

Employment at Will

In an “employment at will” state like New York, New Jersey, or Connecticut, employers are nominally within their rights to terminate any employee not covered by an employment contract at any time for any reason. As a practical matter, firing an employee arbitrarily always raises the risk that he or she will claim the true motive for the firing was discrimination or retaliation. A paper trail documenting a justifiable, nondiscriminatory reason for any termination is essential. If you are firing an employee for poor performance, disciplinary problems, or excessive absenteeism, the records in the employee’s personnel file should demonstrate that you have been noting and addressing these issues with the employee over time. Records should include timely performance reviews, disciplinary warnings, and attendance and timekeeping records. If you are laying off employees for economic reasons, your records should document those reasons, as well as the fair and nondiscriminatory basis you used to select employees to be laid off.

There may be additional steps in the process when employees are covered by either a collective bargaining agreement or an individual employment agreement. These agreements will likely require and define “just cause” for termination. In the case of a union employee, a hearing may be required. The type of hearing will depend on the requirements of the company’s collective bargaining agreement with the union. When the termination involves an employee covered by an individual agreement, be sure to document the ways in which the employee has breached the agreement and justify your decision to discontinue the relationship.

The Exit Strategy

If you are satisfied that termination is indeed the best course of action, do not delay. Carefully prepare for the termination meeting, and observe the following precautions:

  • Have more than one member of your management team at the meeting. Make sure notes are taken on everything that is said and done.
  • Clearly explain the key points relating to the termination: employee performance issues, shortage of work, and so on.
  • Be as truthful and compassionate as possible, and try to make sure that the employee doesn’t leave angry or upset. Remember that the former employees most likely to file suit are those who don’t understand why they were let go or who perceive the employer as unfair. A separate exit interview, either in person or via an exit interview form, can give a departing employee an opportunity to state his or her case and dissipate any lingering anger.
  • Provide a final paycheck and any required information relating to continuation of benefits.
  • Consider offering severance pay accompanied by a formal separation agreement, including extensive general releases for the company, and addressing issues such as confidentiality and non-disparagement. A reasonable severance payment will often deter an employee from filing a discharge- related claim. If the employee in question is in a high-risk category or the amount of severance pay is significant, it may be wise to have your employment attorney draft a separation agreement that the employee must sign in order to receive the severance payment. The agreement should require the employee to keep company information confidential, avoid disparaging the company and, most importantly, waive his or her rights to file termination-related claims against the company under those employment laws that permit such waivers. There are laws that regulate provisions of these agreements, particularly in relation to employees 40 years of age or older.
  • If the departing employee may pose a safety or security risk, take any of the following steps that are appropriate: escort the employee from the building immediately after the termination; terminate any authority the employee has to bind the company (e.g., sign checks or contracts on the company’s behalf); notify banks and vendors immediately; change all electronic logins and passwords; collect all company credit cards, keys, access devices, and company-owned equipment; remind the employee of any continuing confidentiality, non-compete, or non-solicitation obligations; and scan the employee’s hard drive if security may have already been breached.
  • If your company employs 50 or more people and is laying off a significant part of its workforce or relocating a significant number of jobs, it is likely subject to federal and state advance notice laws. Contact employment counsel for assistance with this, as well.

Lawsuits and Claims

A solid paper trail is always the key to a quick and cost-effective resolution of any termination-related legal issue. Suppose you have taken all the right steps and a discharge- related claim is filed against you anyway. Believe me, it happens. When someone files a complaint against your company with a human rights agency or a court, certain legal costs will simply be unavoidable, but if you have done the right things, the defenses you have already built will hopefully limit any possible judgment against you.

The bottom line is this: Cutting staff without paying attention to essential legal protections can be “penny wise and pound foolish.” Even in the face of economic pressure, consider your actions carefully. To avoid unnecessary legal expense, deal with (and document) performance and discipline problems on a regular basis, not just when you are ready to fire somebody, and make sure that terminations and reductions in force are handled appropriately by members of management who understand how to protect the company. Never fire someone on impulse.